Bain’s Quintiles Pays 50% Premium to Finance Dividend: Corporate Finance
Quintiles Transnational Corp. (QTRN) is paying as much 50 percent more for a $300 million loan than on a similar borrowing in June, burdening the company with increased interest costs to fund its second dividend in a year to Bain Capital LLC and TPG Capital.
The biggest provider of testing and drug-trial services to pharmaceutical and biotech firms will pay a fixed 7.5 percent on the five-year credit, according to data compiled by Bloomberg. It pays a minimum 5 percent on a $2 billion floating-rate, seven-year term loan it obtained last year, also used to finance a dividend to its private-equity owners, the data show.
Bain, TPG and other owners are taking advantage of Quintiles’s cash flow to collect roughly $1 billion of distributions in little more than two years, according to Bloomberg data and reports from Moody’s Investors Service. The new loan, due in 2017, represents $23 million of annual interest costs and will finance most of a $335 million payout, limiting the junk-rated company’s ability to obtain upgrades.
“Two in one year is fairly aggressive,” Jessica Gladstone, a New York-based analyst with Moody’s, said in a telephone interview. Quintiles’s “penchant for making dividends” is keeping it from rising above a B1 credit rating, she said.
High-yield, high-risk, or junk, debt is ranked less than Baa3 by Moody’s and below BBB- by Standard & Poor’s.
‘It Was Appropriate’
“Given Quintiles’s strong performance in 2011, we felt it was appropriate to provide a return on investment,” Phil Bridges, a spokesman for the company, said in a telephone interview. Charlyn Lusk of Stanton Public Relations & Marketing, a spokeswoman for Bain, and Owen Blicksilver of Owen Blicksilver Public Relations Inc., a spokesman for TPG, declined to comment.
“The majority of Quintiles employees globally will also receive bonus payments based upon 2011 performance,” Bridges said in an e-mail. The company has 25,000 employees in more than 60 countries, he said. The company had 16,986 full-time equivalent workers at the end of January 2005, according to its annual regulatory filing for 2004, the last one it provided.
“We’re paying dividends, but we’re investing in our business at the same time,” Bridges said in the telephone interview.
The new loan increases Quintiles’s debt to 5.2 times Ebitda, from 4.6 times as of Sept. 30, Moody’s said in a Feb. 23 research report. The fixed-rate loan was issued at the holding company level and has no prepayment requirements, according to Gladstone. It has a pay-in-kind feature that lets the company defer cash interest if it doesn’t have sufficient liquidity to make them, she said.
Bain, the buyout firm co-founded by Mitt Romney, the leading contender to be the Republican candidate for president this year, along with David Bonderman’s TPG and Gillings bought Quintiles in January 2008. 3i also became a significant investor, while Temasek remained an equity owner. One Equity Partners, the private equity arm of JPMorgan Chase & Co., sold its ownership stake in the deal, less than five years after purchasing the company for about $1.7 billion in September 2003.
One Equity had invested $222.3 million in the leveraged buyout, while TPG and Temasek each contributed $90 million, according to an April 2005 regulatory filing.
Quintiles has $2.53 billion of debt, comprising the $2 billion term loan, $225 million revolver and $300 million holding company loan. The $2 billion loan pays the higher of 5 percent or 3.75 percentage points more than the three-month London interbank offered rate. Libor, the rate banks charge each other on loans, was fixed at 0.47 percent yesterday.
Share repurchases and dividends Quintiles has paid since the acquisition by One Equity have “well exceeded” the value of the buyout, according to Moody’s Feb. 23 report.
“Ever since the 2003 LBO, they’ve done a significant amount of distributions to shareholders,” said Gladstone.
The dividends include a payout of about $400 million financed by the sale of $525 million of 9.5 percent notes by Quintile’s holding company in December 2009, according to a term sheet at the time.
The notes were redeemed in a refinancing last year that consisted of $2.23 billion of loans, Bloomberg data show. The debt, which comprised a $2 billion term loan and a $225 million revolving credit line, was used in part to finance a roughly $300 million distribution to shareholders, according a report from Moody’s in May.
Quintiles had $3.2 billion of sales for the 12 months through September, according to Moody’s. Revenue grew more than 10 percent last year as demand returned for Quintiles’s clinical development services, which largely target the late-stage market, S&P said in a Feb. 22 report.
S&P estimated earnings before interest, taxes, depreciation and amortization will increase at a mid-single-digit rate as Quintiles benefits from “slight growth” in pharmaceutical research and development, as well as an increase in outsourcing by large drug companies.
The world’s largest biopharmaceutical services company has reduced leverage after previous dividends, according to S&P. It also said Quintiles’s “shareholder-friendly financial policy” prevents sustained debt reduction and limits the prospect of a higher rating.
“We know the company is going to keep levering up to do this,” said Michael Berrian, an analyst with S&P in Boston, said in a telephone interview.
S&P maintained Quintiles’s BB- junk rating, according to the Feb. 22 report, reflecting its “aggressive” use of excess cash and debt capacity to reward its owners, as well as its position in the growing contract-research industry.
“They generate good positive free cash flow,” said Moody’s Gladstone. “Sometimes their leverage actually got very low for a B1, below 4 times debt-to-Ebitda.”
Moody’s ranking of Quintiles is four levels below investment grade.
“We always kept it at B1 because we always felt there was high risk of future debt-funded dividends or distributions,” she said.
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